Question

Poppy, Inc. has current sales of $30,000 and a profit margin of 5.5%. Poppy estimates that sales will decrease by 8% next year and that all costs will vary in direct relation to sales. What is Poppy’s next year’s pro-forma net income?

a. $1,782
b. $1,650
c. $2,400
d. $1,518
e. More information is needed to answer the question

Answer 1

Poppy, Inc.'s pro-forma net income for the next year is calculated to be $1,518, after accounting for an 8% decrease in sales and maintaining a profit margin of 5.5%.The correct answer is option d. $1,518

Step-by-step explanation:

To calculate Poppy's pro-forma net income for next year, we begin with the current year's sales of $30,000 and a profit margin of 5.5%. If sales are expected to decrease by 8% next year, the projected sales for next year would be 92% of $30,000, which is $27,600 ($30,000 multiplied by 0.92). With all costs varying directly with sales, the costs will also decrease by the same percentage, and thus the profit margin will remain at 5.5%.

To find the net income, we apply the profit margin to the new sales figure:
5.5% of $27,600 = $1,518. Therefore, Poppy's pro-forma net income for the next year is expected to be $1,518.